Electronic commerce (“E-commerce”) is proliferating. As such, various mechanisms have evolved for electronic payments between business, consumers, and the like. All payment systems in the United States fall under one or more “payment rails” with associated law, regulations, and rules. For example, payment rails include the checking system (regulated under UCC Articles 3 and 4, Check 21, Regulation CC, and the like), cash transfers (e.g., Western Union, Paypal, etc.), credit cards (regulated under Regulation Z), debit cards and Automatic Clearing House (ACH) (regulated under the Electronic Funds Transfer Act (EFTA)), wire transfers (regulated under UCC Article 4A), and the like. In general, each of these payment rails includes a transfer of monetary value, a transfer instrument(s), evidence of an obligation, devices for transmitting funds, rules regulating disputes, transferability to third parties, rules regulating time of payment, security, and the like.
Of note in the prior art is the wide use of ACH item origination and clearing (covered under the National Automated Clearinghouse Association (NACHA) rules, incorporated fully by reference here-in) using the concepts of Electronic Checks via POP, ARC, WEB or TEL SEC codes. These ACH items are a form of check truncation, not covered under Check 21, that allows payees to originate a payment item under agreement or published notice to the payors while performing some business service or selling goods or services to the payor at a point-of-sale terminal. These ACH items are not Check 21 UCC items but are commonly referred to as “electronic checks” by the various and wide spread NACHA marketing programs over the last ten years or more. Thus, under existing Ecommerce system interactions, payors are agreeing to pay their bills by using an ACH debit item that is prepared by the payee's backoffice business system. Of special note is the fact that the payors are not generating the ACH items themselves, rather they agree to have the payee truncate their check information to create the ACH item. The ACH payment is cleared using existing ACH clearinghouses and the like.
Checks are negotiable instruments regulated in the United States under the Uniform Commercial Code (U.C.C.) Articles 3 and 4. Traditionally, checks are paper instruments created by the payor filling in a pre-printed form on check stock paper where the payor inputs by handwriting, typing, or printing the required payment information. This paper check is then sent out using the mail, overnight delivery, hand delivery, or the like, but in the end the paper check is physically delivered directly to the payee to satisfy a debt. Upon receipt, the payee deposits the paper check into their bank for credit to their own account. The depositing bank bundles all of the paper checks together and send them to the banks' “Item Processing” department for processing (i.e., sorting, grouping and totaling) by high speed machinery. The purpose of this processing was to generate the necessary accounting entries needed to debit and credit the appropriate checking accounts and clear the payment. If the deposited check originated outside of the bank, the paper check would have to be forwarded for presentment to the originating (or paying) bank for payment.
Traditionally, paper checks moved from the Bank of First Deposit (BOFD) to a clearinghouse and then again from a clearinghouse to either another regional clearinghouse which was closer to the clearing bank (often times a Federal Reserve Bank in the issuing banks geographic area) or directly to the clearing bank. It is the clearing banks responsibility to validate the check, verify the account exists and has sufficient funds and then pay the BOFD so it may credit the account of the depositing payee.
Prior to the Check 21 Act, a bank that presents a check for payment was required to present the original paper check unless the clearing bank has agreed to accept alternative presentment from the depositing bank in some other form, such as electronic image exchange. §3-501(b)(2) and §4-110 of the Uniform Commercial Code (U.C.C.) specifically authorize banks and other persons to agree to alternative means of presentment, such as electronic image presentment. However, to truncate checks early in the collection process and engage in broad-based electronic presentment, a collecting bank would need electronic presentment agreements with each bank to which it presents checks for collection. This limitation proved impracticable because of both the large number of banks and the unwillingness of some paying banks to receive electronic presentment. As a result of the difficulty in obtaining the agreements necessary to present checks electronically in all cases, prior to the Check 21 Act, banks had not been able to take full advantage of the efficiencies and potential cost savings of handling checks electronically.
The Check Clearing for the 21st Century Act (Check 21) became effective on Oct. 28, 2004. Check 21 was designed to foster innovation in the payments system and to enhance efficiency by reducing some of the legal impediments to check truncation (i.e., eliminating a paper check by converting into a digital image and destroying the original paper item). The law facilitates check truncation by creating a new negotiable instrument called a substitute check, which permits banks to truncate original paper checks, to process check information electronically via exchange of check image files, and to deliver substitute checks to banks that want to continue receiving paper checks. A substitute check is created from a check image described by the X.9.37 ‘ANSI’ draft standard or the X9.180 final standard, both of which are herein incorporated by reference in-full. This image file is a digital bitmap in Tagged Image File Format (TIFF) format created by electronically scanning and imaging the front and back of the original paper check. The substitute check (also known as an Image Replacement Document (IRD)), is created by printing the front and back images along with some additional information on an 8.5×11 inch sheet of paper. Under the Check 21 law, this IRD is treated as the legal equivalent of the original check and includes all the information contained on the original check. When printed, the images and data must conform to the X9.140 standard, which is herein incorporated by reference in-full. The law does not require banks to accept checks in electronic form nor does it require banks to use the new authority granted by the Act to create substitute checks.
A substitute check (or IRD) is a paper reproduction of an original check that contains an image of the front and back of the original check and is suitable for automated processing in the same manner as the original check. To clear a check for consideration of payment, the depositing bank transfers, presents, or returns the substitute check (or another paper or electronic representation of a substitute check, such as an Image and Cash letter file) and warrants that (1) the substitute check contains an accurate image of the front and back of the original check and a legend stating that it is the legal equivalent of the original check, and (2) no depositary bank, drawee, drawer, or endorser will be asked to pay a check that it already has paid. The substitute check for which a bank has made these warranties is the legal equivalent of the original check for all purposes and all persons.
Although Check 21 has facilitated the inter-bank exchange of electronic check images, it has not been fully utilized or enabled throughout the payment system due to a variety of security weaknesses or legal holes that are currently viewed to be either unsolvable or to be extreme business method barriers which would need to be overcome before a wider adoption of Check 21 imaging concepts can be implemented across the payments industry. First, in terms of general Check 21 industry implementation problems, frequently both the actual paper check and the Check 21 image may be cleared by the bank creating a double debit situation. Note that while the actual number of occurrences of these double debits has been reduced as banks improve their internal Check 21 business methods and systems, these same well known debit issues are generally unavoidable for any bank first implementing a Check 21 style image clearing process for either the forward or return clearing cycles. Second, a variety of security issues are of grave concern to banks given the entire loss of the existing paper security features which have been developed over the last 30 to 40 years. These image security holes show up primarily in the banking industry when they contemplate the concept of having a customer present an image to a bank to be settled as a UCC check payment. Consider for example, the case where a customer shows up with what looks like a Check 21 image in IRD form.
As currently viewed by the industry, anyone with a modest degree of skill in digital graphics editing can create a valid, Check 21 like image using PhotoShop or other graphics software programs which uses stolen DDA account data to create a fraudulent check. Also, given the lack of security in paper IRDs, banks are reluctant to accept random IRDs for deposit, slowing down their acceptance as returned items. Finally, banks do not believe that end users or customers are permitted under the existing Check 21 act so from the industry viewpoint, there are legal and regulatory barriers that must be overcome before Check 21 items would be viable consumer payment mechanisms. These problems must be overcome before the concepts of Check 21 can be applied to everyone—allowing more users to receive the benefits that are already being received by the banks. The benefits of image processing include faster delivery, lower costs from efficiently processing payments and the reduced clearing time and reduced risk exposure from unknown payor items on out of town banks. Finally, if properly implemented, the concepts provide by the Check 21 act would enable everyone from consumers to businesses to governments to charities to create and effectively process, secure electronic payments in a manner similar to existing low cost electronic payment methods such as ACH items covered under the National Clearinghouse Association (NACHA) rules.
Referring to FIG. 1, conventionally under Check 21, substitute checks or IRDs are only utilized between banks, such as clearing banks, banks of first deposit, and the like. A flowchart 10 illustrates an exemplary embodiment of Check 21 under conventional operation. First, a payor drafts a paper check from their demand deposit account (DDA) bank (step 12). Next, the paper check is physically delivered, such as mailed, hand delivered, etc., to a payee (step 14). The payee manually deposits the paper check into their bank account (step 16). The bank where the payee deposits the check is referred to as a bank of first deposit (BOFD). Once in the BOFD, the paper check is sorted and converted into a substitute checking according to the regulations under Check 21 (step 18). The BOFD can pay the payee cash, credit the payee's account, or the like (step 20) once the check has been deposited into the payee's account. Also, the BOFD initiates the clearing process with the substitute check through a clearinghouse or the like (step 22). The clearing process moves the substitute check to a clearing bank, i.e. the bank with the DDA account of the payor, and the clearing bank validates the substitute check, verifies the account exists with sufficient funds, and finally pays the BOFD (step 24). Finally, the clearing bank can use the substitute check image with the payor's monthly statement in lieu of paper checks (step 26).
Of note, the Check 21 Act does not require any bank to use electronic check processing, receive electronic presentment, or create substitute checks based on check images. However, after the effective date of the Check 21 Act, any bank that requires an original check must accept a legally equivalent substitute check in satisfaction of that requirement. As a result, for the most part, banks would not be required to change their check processing equipment or practices because of the Check 21 Act, and there would be no need for a bank to sort original checks and substitute checks separately during the check collection process. Using the substitute check format, banks which choose to use image processing during their check collection and clearing process are allowed to do so while maintaining backwards compatibility with banks which do not have the ability to electronically process image files. For example, in the past a depositary bank in California that receives a check drawn on a bank in New York would transport the original paper check back to New York for payment. Now under Check 21, a substitute check image file can be sent to the New York bank without specific prior contractual agreement or consent by the New York bank to the California bank. Now, if needed, the New York bank (or its agent) can receive the image file and print it in IRD or substitute format and continue to process the re-created paper check using their traditional check clearing process. In summary, Check 21 allows banks that wish to image checks and exchange image files to do so while still allowing some banks to receive paper compatible checks based on these image files.
Electronic payments and images and the like contain raw data which constitutes the item itself, however there is another form of data called “metadata”. Metadata is data about data. An item of metadata may describe an individual datum, or content item, or a collection of data including multiple content items. Metadata is used to facilitate the understanding, use and management of data. The metadata required for effective data management varies with the type of data and context of use. The concept of “generating a bitmap from metadata” is foreign to banks, but common in the computer graphics industry. Thus, those skilled in the art of payments generally do not know how the computer graphics bitmap “rasterization” process works. However, as is known by those skilled in computer graphics, it is often easier and more convenient to generate bitmap images dynamically from metadata. Further, there is no nexus between metadata driven bitmap generation and the payment system, checks, or legal contracts, the UCC and the like. Also it is considered by the present invention, in order to make an electronic check image payment system acceptable to banks, additional security is required to protect banks from accepting fraudulent images (e.g., created by hackers using a graphics program). Given the size and degree of investment that banks have made in paper check imaging equipment, it can be seen by those of average skill that there has been no incentive for banks to pay for the designing and building of new software systems to enable end user created paperless Check 21 items. Additionally, there is little to no existing Public Key Infrastructure (PKI) systems at banks (other than Secure Sockets Layer (SSL) keys for website security) to facilitate end user digital signing of Check 21 images.
Thus, conventional mechanisms in the banking and payment industry include imaging of paper checks. Check 21 law only allows banks to truncate paper checks to create Check 21 items. Remote (electronic) deposit is currently available where scanned paper checks are used, but cleared through an Automated Clearing House (ACH). There exists no conventional mechanism to allow electronic checks to flow through the entire check payment system without reduction to paper at some point. Existing “electronic check” prior art does not solve these problems as these all disclose a paper check in one form or another in the process. Further, these paper checks do not comply with ANSI X9 standards.
Additionally, the checking system provides advantages over other payment rails, such as lower transaction costs, advantageous legal protections to payors, and the like. Thus, it would be advantageous to utilize the electronic capabilities associated with Check 21 to form an Electronic Payment System operable under the checking system.